APRA seeks local commitment from foreign banks

Foreign-owned banks have been warned against trying to circumvent Australian laws by running their local operations from offshore.

The Australian Prudential Regulation Authority has written to overseas institutions with an interest in Australia saying it is prepared to revoke the licence of any group that poses a threat to its ability to supervise the local banking market.

APRA is the second regulatory agency to voice concerns about foreign banks targeting Australian customers after the Reserve Bank of Australia raised the issue last month.

It comes as up to eight overseas financial institutions chase licences to move into the local market.

To operate fully fledged banking operations in Australia that can solicit business from retail customers, foreign groups are required to be licensed by APRA as authorised deposit-taking institutions (ADIs).

Related Quotes

Company Profile

In a letter to overseas banks, APRA executive general manager
Charles Littrell
noted some of these institutions were running their Australian business from overseas offices rather than through local branches.

“APRA has never been inclined to license a ‘brass plate’ operation of a foreign bank as an ADI," Mr Littrell wrote.

“Similarly, APRA would expect to revoke the ADI licence of a foreign bank that transferred all of its substantive operations and book of business to offshore offices.

“The foreign ADI is expected to maintain local staffing sufficient to demonstrate adequate local control over the Australian business and compliance with all of APRA’s prudential requirements applicable to foreign ADIs."

Spain’s largest bank, Santander, and India’s Bank of Baroda, which already has a representative office in Australia, are among the foreign banks that have recently applied for a local banking licence.

India’s largest private bank, ICICI Bank, is also understood to be seeking a licence.

Overseas financial institutions have been attracted by Australia’s relative economic prosperity and close business links with booming Asian economies.

While some of the foreign groups are seeking entry to Australia to service business and wholesale clients based here, others are expected to emulate global banks such as HSBC, which have opened branches to target retail customers.

APRA said it did not object to foreign banks that chose to run their Australian businesses from offshore.

But it warned they would not be granted full ADI status and would face restrictions, including a ban on targeting retail customers.

“Over time, reflecting the global nature of banking business and the centralisation of many functions, foreign banks operating in Australia as branches have conducted some aspects of their local operations from offshore or outside the branch," Mr Littrell wrote.

“In general, APRA does not have a fundamental concern with these types of operational structures but notes that they have the potential to lessen APRA’s ability to provide effective prudential supervision of the local operations."

RBA assistant governor
Malcolm Edey
suggested last month that foreign banks could be forced to establish subsidiaries in Australia to run local operations.

He said this would help protect Australian customers in the event of another global credit shock.